Renting vs. Buying a Home

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In the scenario below, would you buy or rent a home?

Buy
6
32%
Rent
13
68%
 
Total votes: 19

kerrigjl
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Location: Cleveland, Ohio

Renting vs. Buying a Home

Post by kerrigjl » Thu Mar 13, 2014 8:52 pm

(Not sure if this is better off in Personal Finance; mods, please feel free to move it if so)

Looking for some advice on renting versus purchasing a home. My wife and I are practically halfway through our medical training, and, this June, we'll be moving to a midwestern city to complete the next phase (for her, residency; me, fellowship) of training. We'll be there between 4 (if we leave when she's done) or 5 (if I do my sub-fellowship there, in a field I intend to pursue) years and then will be moving closer to our family. The question I have is whether we should rent a home or purchase one.

We have a 7 month old and a dog; as such, she wants a yard. We've been living in an apartment for the last eight years and she wants to have something a bit more spacious. As such, we are looking at 3BR, 2BA homes with medium to large yards in the near suburbs of said city (I'm geographically limited, as I have to be within 15 minutes' drive of the hospital... and most of those areas are seedy, at best). We're first time home buyers. We've decided that, if we buy, we'll spend no more than $250k; the loan terms for which we are pre-approved are as follows:

$237,500 loan on $250,000 purchase price (95%LTV)
7/1 ARM @ 3.25%, Principal and Interest payment = $1,033/month
30 Year Fixed @ 4.625%, Principal and Interest payment = $1,221/month

$250,000 loan on $250,000 purchase price (100%LTV)
7/1 ARM @ 3.375%, Principal and Interest payment = $1,105/month
30 Year Fixed @ 4.75%, Principal and Interest payment = $1,304/month

We are using physician loans since we don't reasonably have enough saved for 20% down and are looking at the ARM due to our interest in leaving the area in 4-5 years, at which time we'll sell to the next person. Our daughter will be in kindergarten the final year we're there, if we stay for five years; as such, we are looking at elementary school quality (which, for the nice neighborhoods, will drive the price up toward the 250k range). Her father is a realtor, her uncle is a realtor, and her mother is an architect; they all say that buying is a much better option than renting...

Usually, it seems to be a wash for most online calculators, with some saying buy, others saying rent. For a comparable house (3br, 2ba, 1500sq feet +) in the same areas, rent is 1000-1750 (again, more in the better school districts) per Zillow.

We'll be making around $105k the first year, going up about 3% each year we'll be there (not counting moonlighting at about $1k per shift; not sure how much I'll be able to do).

A paycheck calculator spits out the following data per monthly pay period:

Monthly Gross Pay $8,750.00
Federal Withholding $835.00
Social Security $542.50
Medicare $126.88
State tax $314.70
City tax $175.00
School tax $0.00
Net Pay $6,755.92

As of this moment, we have 16k in cash, which comprises our emergency fund and a little extra, $27.8k in ETFs with Vanguard which are in taxable, and $18.1k in Roth IRAs that we'd obviously prefer not to touch. Our monthly liabilities are about $400 between utilities/TV/cell phone (now, not in new house, obviously), and we'll have loan payments totaling as follows:

Me:
$7114 @ 0% interest with a $100 payment/month (never paying this one off early!)
$28352 @ 6% interest, 15 year term with a $236.67 payment/month (refinanced from higher very recently)
$24587 @ 6.25% interest, IBR, with an initial $106 payment/month

Her
$194871 @ 6.8% interest, will be consolidating and pursuing IBR, which should yield an initial $840 monthly payment (unfortunately, neither of us are PAYE eligible).

Total: $1282.67/month in loan payment

We do intend to continue "living like a resident," as Jim Dahle would say, after completing our training until these loans are gone, which is why we're generally paying what's expected and nothing more. Additionally, if it's still around, when I finish fellowship, I'll be one year away from PSLF (and she 5-6, depending on if she pursues fellowship after her residency). I know it can't be counted on, but it's nice if it works out. We have taken the standard deduction in the past, as our student loan interest doesn't come anywhere near enough to itemize.

As an additional expense, my term life and disability insurance costs about $5k per year, combined; she has a paid up whole life policy with a current cash value of $35465 (death benefit $193,121; given to her at birth by her grandmother; current loan interest rate 8%). Car insurance for both of us is $1240 per year (cars bought used and paid with cash). Umbrella policy of $1m is $134 a year at present. Overall, that looks like $2400 in expenses per month, not counting rent/mortgage and the cost of owning a home, if that's the route we go. We also aren't including child care, which, once we get into daycare, will be about $300 per week (so now $3600 per month in expenses), but that won't be until December; until then, as we have no family in this city, we're looking at a nanny for about $800 to $1k per week... hoping to find someone to nanny share to knock that in half. We are/will be maxing out the childcare FSA, of course.

If there's any other information that would be helpful in your providing advice, please let me know; we're scheduled to travel to our future rust belt home to look at houses the first weekend in April and will hopefully be able to make an offer, if we still desire purchasing (and if we don't like anything we see, we'll definitely rent). Otherwise, know that I look forward to your responses!
Last edited by kerrigjl on Fri Mar 14, 2014 1:57 pm, edited 2 times in total.

NorCalDad
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Re: Renting vs. Buying a Home

Post by NorCalDad » Thu Mar 13, 2014 11:38 pm

If your time frame is only 4-5 years and this seems like a coin flip for you, I vote for renting. You have enough other financial headwinds between huge school debt and expensive daycare costs that it doesn't seem worth the risks of homeownership for a short duration. The commissions on the sale in a few years will wipe out much of the equity you build through ownership, and that's assuming you build equity and don't face a market decline. Maintenance, taxes and homeowner's insurance will come on top of the monthly estimates you gave for mortgage payments.

kerrigjl
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Location: Cleveland, Ohio

Re: Renting vs. Buying a Home

Post by kerrigjl » Thu Mar 13, 2014 11:45 pm

NorCalDad wrote:If your time frame is only 4-5 years and this seems like a coin flip for you, I vote for renting. You have enough other financial headwinds between huge school debt and expensive daycare costs that it doesn't seem worth the risks of homeownership for a short duration. The commissions on the sale in a few years will wipe out much of the equity you build through ownership, and that's assuming you build equity and don't face a market decline. Maintenance, taxes and homeowner's insurance will come on top of the monthly estimates you gave for mortgage payments.
As to homeowner's insurance, the first quote I got was $840 per year ($70/month) on a test home. The property taxes in the areas we're looking last year ranged from $4942 to $7141 ($504 a month average). Maintenance is often quoted at 1% of home value per year, correct? So that'd be about $2k/year ($167/month). Overall, that adds up to $741 a month of costs, not counting "surprise" maintenance, or the wife's desire to redo the flooring in a house if it doesn't have all hardwood floors (assuming that hardwood's under the carpet).

Thanks for the input.

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JonnyDVM
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Re: Renting vs. Buying a Home

Post by JonnyDVM » Thu Mar 13, 2014 11:48 pm

Wow, your situation sounds very similar to the one we were in in 2010. Many will say rent. We bought and I have no regrets whatsoever. There's value in not having to deal with a landlord and actually owning a home. It's yours, you can do what you want with it. This is especially true if you have a dog and we have two. We are fortunate in that we bought in a great buyers market and houses in our neighborhood have sold rapidly lately so our house has gained value. My wife finished her residency last summer but we decided to stay in the house until we have paid off our loans. If you buy a house you want to be able to stay in it for about 5 years. It sounds like that is roughly the time frame you'll be looking at. I would say go ahead and buy.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

denovo
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Re: Renting vs. Buying a Home

Post by denovo » Fri Mar 14, 2014 3:04 am

JonnyDVM wrote:Wow, your situation sounds very similar to the one we were in in 2010. . We are fortunate in that we bought in a great buyers market and houses in our neighborhood have sold rapidly lately so our house has gained value.
I think this is what is coloring your decision. If you were unlucky enough to have bought in 2006 and forced to sell in 2011, which is about 5 years, you may be cursing that decision for years to come. Depending on your local market, 2010 was the bottom so of course the decision looks good, but don't confuse luck with making a good decision.
"Don't trust everything you read on the Internet"- Abraham Lincoln

denovo
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Re: Renting vs. Buying a Home

Post by denovo » Fri Mar 14, 2014 3:15 am

OP, first off, tell your wife to get rid of the whole life, and mimic you with term and disabilty.

Beyond that, I would strongly reject the idea of buying a house. I am more aggressive in advocating ownership than the average poster here, but 5 years is too short of a time frame to recoup transaction costs , account for fluctuations in the market, and so forth.

However, I think implicit in your post is you are thinking your only choices are renting an apartment or purchasing a home. I understand why your wife would want a home, because she wants to have some stability, but there's a solution a that.

Why not rent a single-family home in the same neighborhood that you are considering a purchase? The rental market for single-family homes is thin, but has gotten larger over the last few years as some institutional investors have stepped in and some owners are biding their time waiting for prices to reach their peaks again.

I would note that you are likely to run into a lot of accidental landlords in the single-family home rental business, although my preference would be to work for a professional company. Given you have a 5 year commitment to the area, you can use that to your benefit. I used to be involved in renting out single-family homes and I would roll out the welcome wagon for you and probably rent to you at a reduced rate since I know you will stick around for a while and aren't likely to cause problems. Perhaps you can consider negotiating a long-term lease so you have some stability.
Last edited by denovo on Fri Mar 14, 2014 6:01 am, edited 1 time in total.
"Don't trust everything you read on the Internet"- Abraham Lincoln

kerrigjl
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Location: Cleveland, Ohio

Re: Renting vs. Buying a Home

Post by kerrigjl » Fri Mar 14, 2014 5:56 am

denovo wrote:OP, first off, tell your wife to get rid of the whole life, and mimic you with term and disabilty.

Beyond that, I would strongly reject the idea of buying a house. I am more aggressive in advocating ownership than the average post here, , but 5 years is too short of a time frame to recoup transaction costs , account for fluctuations in the market, and so forth.

However, I think implicit in your post is you are thinking your only choices are renting an apartment or purchasing a home. I understand why your wife would want a home, because she wants to have some stability, but there's a solution a that.

Why not rent a single-family home in the same neighborhood that you are considering a purchase? The rental market for single-family homes is thin, but has gotten larger over the last few years as some institutional investors have stepped in and some owners are biding their time waiting for prices to reach their peaks again.

I would note that you are likely to run into a lot of accidental landlords in the single-family home rental business, although my preference would be to work for a professional company. Given you have a 5 year commitment to the area, you can use that to your benefit. I used to be involved in renting out single-family homes and I would roll out the welcome wagon for you and probably rent to you at a reduced rate since I know you will stick around for a while and aren't likely to cause problems. Perhaps you can consider negotiating a long-term lease so you have some stability.
I apologize for not making it clear in the original post, but the rentals we're looking at would be single family homes (or a duplex, which seems to be more common). Looking at Zillow and Padhopper, there are eight properties in the area in which we're looking that fit our requirements; few if any seem to be with a leasing company, and none are in the area with the best schools.

Interestingly, as to selling the whole life, I had posted in an earlier thread that question, and the consensus on this forum was to keep the policy, as it's completely paid off and the initial terrible returns were 20 years behind us. I intended to have her purchase disability in her final year of residency in four years; I would have preferred to sell the whole life and have her buy at least a million in term while she's still young, but, again, the advice received here was to hang on to the whole life policy. Perhaps I should revisit that question again.

Rebecca_S
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Re: Renting vs. Buying a Home

Post by Rebecca_S » Fri Mar 14, 2014 7:47 am

I would lean towards renting. As a resident and fellow with a small child, you won't want to spend precious time doing house maintanance on a home you won't keep long-term. Renting a home still requires some work (lawn care is often your responsibility) but is a lot less headache than renting.

kerrigjl
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Location: Cleveland, Ohio

Re: Renting vs. Buying a Home

Post by kerrigjl » Sun Mar 16, 2014 5:58 pm

Rebecca_S wrote:I would lean towards renting. As a resident and fellow with a small child, you won't want to spend precious time doing house maintanance on a home you won't keep long-term. Renting a home still requires some work (lawn care is often your responsibility) but is a lot less headache than renting.
Thanks for the input. Avoiding headaches is ideal!

jackpullo997
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Re: Renting vs. Buying a Home

Post by jackpullo997 » Sun Mar 16, 2014 6:52 pm

Rent. Focus on your training.

As an MD, you will be set for life financially, so a few $100 here or there is a rounding error.
Focus on the non-financial aspect of this decision.

sls239
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Re: Renting vs. Buying a Home

Post by sls239 » Sun Mar 16, 2014 7:27 pm

I would be comfortable buying a newer house, where there just isn't much that is likely to be worn out or outdated assuming the area has a strong building code or you can identify the builder as a high quality builder. 20 years old or newer would be fine as long as the HVAC and roof are fairly new.

But I would not buy an older house because they can be a PITA. You can think you need a little repair and they can get started and find out you need a whole lot more and you either have to make the repairs or disclose it when it is time to sell. Even if it looks nice remember that there have been a lot of "skin-deep" remodels done by desperate sellers.

A lot of the rust belt cities have a lot of houses from the 40s - 60s and didn't experience the recent booms nearly as much so I'm not sure what is available within your radius. While I would be fine renting one for a few years, I'd only buy if I was going to be there long-term and willing to put in as much money as necessary to get it fixed-up right.

ETA - We bought in a city (a rust-belt one) knowing we'd take the first decent offer to go somewhere else. And while we did lose some money in transaction costs, it was completely worth it given what was available to rent and for how much. (I really had absolutely intended to rent).
Last edited by sls239 on Sun Mar 16, 2014 7:37 pm, edited 2 times in total.

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LadyGeek
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Re: Renting vs. Buying a Home

Post by LadyGeek » Sun Mar 16, 2014 7:31 pm

kerrigjl wrote:(Not sure if this is better off in Personal Finance; mods, please feel free to move it if so)
It's moved. This thread is now in the Personal Finance (Not Investing) forum (rent vs. buy).

I would discount the poll results, or even delete the poll, as you need to understand the reasons behind each selection.

Also, see the wiki: Owning vs renting
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

gcat
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Re: Renting vs. Buying a Home

Post by gcat » Sun Mar 16, 2014 9:17 pm

I would be inclined to rent. Although the benefits of home ownership can be immense, I would be hesitant of making a very significant purchase for a relatively short timespan. The worst case scenario of purchasing a house would be a sudden devaluation of your property: if your $250k house sold for 80% value, or even less, would you regret buying? Your answer may very, however I am not very risk-averse, hence my preference to renting.

ekphora
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Re: Renting vs. Buying a Home

Post by ekphora » Sun Mar 16, 2014 9:20 pm

LadyGeek wrote: I would discount the poll results, or even delete the poll, as you need to understand the reasons behind each selection.
Agree...polls like these reflect a lot of bias (e.g., who chooses to respond, what people think the originator wants to hear, etc.)

I think the debate reflects what you already know, which is that you're looking at an equivocal case from a return on investment standpoint (five year hold, price-to-rent ratio of ~12, etc). As others have mentioned, you will eventually look back on this as a financially sound or sour decision based primarily on 1. property appreciation (relative to how the market performs) and 2. the presence/lack of unpleasant surprises. You can't predict either of these with a huge degree certainty, so I wouldn't bother making this decision about your money today. Plus, given that you're young and have significant earning potential, I would posit that even a large swing in value (+/-25%) won't significantly impact your retirement/future flexibility in a meaningful way.

Having made this decision recently (in favor of buying after renting for many years), I would offer a couple of other lenses to consider:

1. Your environment - I found that we dramatically undervalued the importance of being able to design an environment that met our needs ...after we bought, we reworked the layout and created the right living space for our newborn (e.g., a different room shape, built-in closets, etc). The value of this flexibility has so far outpaced the headaches of dealing with day-to-day maintenance issues (and we've had our share so far). But it's important to know how these headaches affect you and how much your living environment impacts your mood...for us, it's been freeing, but for many, this equation works the other way.

2. Your / your wife's happiness - My wife was also a big proponent of buying and I was heavily in the renting camp. I systematically tried to remove all of her issues with rentals - e.g., desire not to have to move multiple times by looking at a 5-year lease, desire to get our kid into the right public school by looking at a few specific streets, etc. We found a rental option that met her checklist and yet, she still maintained a preference for buying. I think there are a lot of emotional aspects to buying that are hard to put on a pros/cons chart, but are still important to consider.

Good luck with your search,

/ek

Leemiller
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Re: Renting vs. Buying a Home

Post by Leemiller » Mon Mar 17, 2014 9:43 am

I would rent. Even in my high COL area only some places have appreciated. In a certain price range, homes are sellin for what they did 5 years ago. Meaning with transaction costs those sellers who
bought around then are losing about 8% or more (original closing costs, Realtor fees, and unknown maintenance costs & upgrades that were done).

Then again buying may be worth it. Personally, I don't see much upside for appreciation as boomers retire and interest rates rise. Fwiw we are a two attorney household looking to buy our first home and the delayed gratification can be a bear at times.

Twins Fan
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Re: Renting vs. Buying a Home

Post by Twins Fan » Mon Mar 17, 2014 10:38 am

First, I am very much the home buyer type.

But as mentioned, my personal experience made me vote rent in the OPs situation. My family and I moved out of state in 2005 so I could take a job, gain some experience, and move back closer to family not too long after that. I wanted to rent, the wife at the time wanted to buy, and we all can guess who won there. :D I bought a house in 2005, didn't have 20% to put down, 100% financed, 2009/2010 came around, and it was time to move back closer to family. Well, I was underwater on the mortgage, couldn't sell, and became an accidental landlord.

If it's a known temporary situation, don't lock yourself into something that can be pretty permanent.... is my advice. (I know a mortgage isn't exactly permanent, but I couldn't think of a better wording there)

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